Citi will be run for the shareholders - but which ones?

Citigroup's (C) stock plunged today after announcing it reached a deal to boost the U.S. government's stake in the beleaguered bank to as much as 36 percent. But despite the agreement, CEO Vikram Pandit said during a conference call with analysts he will continue to "run Citi for the shareholders."

Of course he will. But the larger questions is, which shareholders will he run the bank for -- long-term Citigroup investors or the new government entities that now own the lion's share of the company?

The truth is, Citi's deal with the Treasury Department comes largely at the expense of the company's current common shareholders, who will be left owning just 26 percent of its stock. Other investors in its preferred shares, like Saudi Prince Alwaleed bin Talal and an investment fund run by the government of Singapore, will own as much as 38 percent.

The company won't get any new government money in the deal. Instead, the agreement will allow the Treasury Department to convert as much as $25 billion of its investments in preferred shares, made with money from the bailout fund, to common stock -- as long as the private investors agree to do the same.

All told, Citigroup could issue as much as $52.4 billion in new stock under the deal. The terms of the deal left many observers wondering who will really run the company.

"Will Citigroup be run for the shareholders, or is Citigroup going to be run to fulfill public policy goals or some other purpose?" asked Deutsche Bank analyst Michael Mayo in a conference call with company executives this morning.

Pandit said the agreement should ease investors' fears about a possible government takeover of the bank, rather than stoke them.

"For those people who have a concern about nationalization, this should put those concerns to rest," Pandit said. "We're going to run Citi for the shareholders."

Big institutional investors such State Street Global Advisors, Capital World Investors and Barclays Global Investors are among the biggest owners of Citi's common stock, according to Securities and Exchange Commission filings.

The markets weren't soothed, however, as Citigroup saw its share price fall as low as $1.42, a decline of almost 43 percent from yesterday's close. And proponents of dealing with big, troubled financial institutions through a process like the one the Federal Deposit Insurance Corp. already uses to shutter insolvent banks weren't happy, either.

Pandit and Citi Chief Financial Officer Gary Crittenden said the agreement would help the company boost a measure of financial strength known as tangible common equity, which had fallen below the level that regulators consider dangerous.

In total, Citi has received $45 billion in capital injections from the government. It has also issued $20.6 billion in short-term bonds under a guarantee program run by the FDIC, according to SNL Financial.

Taking all that money makes it hard for Citi's management to say no when Washington asks for something. In this case, it wants more independent directors on the company's board. That has proven a tall order, according to The Wall Street Journal, which reported that Citi Chairman Richard Parsons was turned down by two individuals to whom he offered board seats.

The government's ability to force such a change suggests that while the Treasury Department may not own a majority of Citi, it is wielding powerful influence over the company, 24/7 Wall St. editor Douglas McIntyre wrote earlier on Daily Finance.

"Once an outside investor can name the board, a company is no longer independent," McIntyre wrote. "All of the other shareholders have lost their rights."